Latest CFTC reporting fine highlights the need for robust controls

Latest CFTC reporting fine blog text

The recent announcement by the Commodity Futures Trading Commission (CFTC) that it had fined a tier one Swap Dealer $1.5m for failing to comply with swap data reporting obligations is a timely reminder of the importance of ensuring accuracy when reporting.

A simple valid but wrong issue

The issue related to valuation submissions where the firm submitted daily valuations for each open position but a “single issue within the reporting engine” resulted in the wrong mark-to-market value being populated for 91% of the equity swap positions.

This is a very timely reminder of something I’ve been advocating for years and the team here at Kaizen are very passionate about. This is what we call the ‘valid but wrong’ problem. It’s not enough to get the submissions accepted into the SDR and call it job done. The data may have been validated but it doesn’t mean it is accurate. This is why it’s crucial that firms have robust controls to continually assess the integrity, completeness and accuracy of the data. Once it’s in the SDR it is regulated data and no longer your own.

Sleepless nights

The apparent simplicity of this issue – supposed to source from Field A but instead picked up Field B and both look like good valuations – will alarm many a reporting firm. Such a simple mistake in the original code or a defect that was introduced later but with very serious consequences. Aside from the fine there’s the costs of the investigation, the time spent discussing with the regulator, the adverse publicity and remediating 22 million records across several years’ submissions.

Clearer standards means more scrutiny

With the long awaited ReWrite due in May 2022 facilitating the CFTC’s stated mission of prescribing clearer standards to enforce better data quality then it goes without saying that improved standards will mean increased scrutiny. Replacing the current differences in reporting formats across different asset classes and the different SDRs will make it easier for the regulator to monitor and analyse the data. Better standards means higher expectations and less excuses. We’ve seen this before for example in Europe where the introduction of the EMIR Article 9 RTS revision in 2017 led to increasing levels of enforcement from the European authorities.

Testing times

Our advice remains simple. It’s all about the controls, and firms need to be testing their data now. Worst case scenario there is a specification that says source from Field B when it should be Field A. Nine times out of ten UAT testing is not going to find that before go-live because it’s to spec. Firms need to be assessing their data during the project phase, ongoing into production and continually from there on.

The CFTC is on record since the 2015 ‘Request for Comment on Draft Technical Specifications for Certain Swap Data Elements’, that kickstarted the ReWrite of the DFA reporting rules, as saying that clearer standards will “assist the Commission in fulfilling its regulatory mandates”. After nearly nine years of struggling with inconsistent data formats I can see very little appetite within the Commission for accepting data quality issues when the new standards come into force next spring.

At Kaizen we are already very focused on the CFTC ReWrite and SEC SBSR reporting and are committed to helping our clients meet these new obligations and report accurate data from the start. Contact us if you’re concerned your reporting might be valid but wrong or to discuss how we can help you get ready for these important changes.